A 1930s president set tariffs to put America first, then a world war broke out: is history repeating itself now?
- Qian Liu says policymakers have sown the seeds of another economic meltdown because they went for a quick fix to the 2008 global financial crisis
- Wealth and income inequality are at historically high levels, and might precede crises as severe as the Great Depression and the second world war
The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.
But monetary stimulus is like an adrenaline shot to a stopped heart: it revives the patient, but it does nothing to cure heart disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labour markets to tax systems, fertility patterns and education policies.
10th anniversary of the financial crisis
The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated for the most efficient uses. Instead, it raised global asset prices to levels even higher than before 2008.
As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance for our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilise and stimulate the economy.
If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have also been characterised by public antipathy against minority groups or foreign countries – attitudes that might fuel unrest, terrorism, or even war.
For example, during the Great Depression, American president Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent four years or so, global trade shrank by two-thirds. Within a decade, the second world war had begun.
To be sure, the second world war, like the first, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.
According to research by economist Thomas Piketty, a spike in income inequality often precedes a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster. While the causality has yet to be proven, given the limited number of data points, the correlation between inequality and chaos should not be taken lightly, especially with wealth and income inequality at historically high levels.
Voters have good reason to be frustrated, but the emotionally appealing populists they are supporting are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s America – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.
Qian Liu is an economist based in China. Copyright: Project Syndicate